Evidence from developing countries points towards the growing
importance of non-farm activities in the income-generating portfolio of rural
households (Lanjouw and Stern, 1993; Estudillo and Otsuka, 1998). From an
extensive review of the literature, Reardon et al. (1998) show that rural
non-farm activities account for 42 percent of the income of rural households in
Africa, 40 percent in Latin America and 32 percent in Asia. It is critical to
determine how such activities can be promoted, given the importance of non-farm
income as a mechanism whereby rural households can maintain their livelihoods
and as a possible path out of poverty. Particular attention should be paid to
ways in which spin-off activities in the non-farm sector can be promoted in the
presence of agricultural growth. Spin-off activities can emerge from backward
and forward production linkages with agriculture, or through expenditure
linkages that come with rising agricultural income.

In this volume, several case studies of farm/non-farm linkages
are presented in which spin-off activities already exist. The purpose of the
case studies is to explore the ways in which spin-off activities were promoted
and to consider how the activities might be further supported. The case studies
focus particularly on the following aspects:

institutional:
rules of the game such as contracts and standards that govern economic
relations;

organizational: players such
as associations and intermediaries;

technological: instruments
that can be used to promote spin-off activities from the agricultural
sector.

To give adequate consideration to the importance of these
instruments, attention was paid to the differences in promoting spin-offs in
low-income countries such as Ghana and Ethiopia as opposed to middle-income
countries such Peru and Mexico. The challenges in the former group include
limited local demand and limited investment funds for spin-off activities; the
challenges in the latter group are for spin-off activities to stay local,
because there are often incentives for farmers to buy inputs from non-local
sources and for processing to take place outside local areas.

The purposes of this introductory chapter are to lay the
groundwork for the case studies and to summarize the results. The chapter is set
out as follows: Section 2 gives a brief conceptual framework, explaining the
types of spin-off activities that are linked to agriculture, Section 3 provides
an overview of the six case studies presented in this volume and Section 4 notes
the key points from the case studies concerning actions taken to spur spin-offs
in terms of institutions, organizations and technologies.

CONCEPTUAL FRAMEWORK

The literature identifies two major types of farm/non-farm
linkages: production and expenditure. Production linkages can be further divided
into backward and forward linkages, or, to use an alternative terminology,
up-stream and down-stream linkages. Backward production linkages refer to
linkages from the farm to the part of the non-farm sector that provides inputs
for agricultural production, for example agrochemicals. Forward production
linkages refer to the part of the non-farm sector that uses agricultural output
as an input. The distribution and processing of agricultural outputs are
fundamental components of forward production linkages.

Expenditure linkages refer to the fact that households
deriving income from one type of activity, farm or non-farm, are likely to spend
that income on products of other activities. Farmers buy non-farm products with
income generated from agriculture. Local entrepreneurs and wage earners use
income from the sale of non-farm products to buy food and other agricultural
outputs. Expenditure linkages can be divided into consumption and investment
linkages. Consumption linkages refer to expenditures related to household
consumption; investment linkages refer to expenditure used to finance farm or
non-farm activities. Investment linkages can be particularly important within
households. Returns on farm activities may be invested to initiate or expand
non-farm activities and vice versa.

Different types of spin-off activities will emerge, depending
on the structure of the agricultural sector and the type of growth that is
occurring. If agriculture requires significant external inputs, growth in
backward production linkage activities are to be expected. If output from
agriculture requires processing before it can be sold, or if there is
significant value added by processing, forward production linkages are to be
expected. If there is sufficient growth in the agricultural sector to induce
rural income growth, expenditure linkages will induce growth in consumption and
possibly investment. Dynamic agricultural sectors are more likely to have
multiple and diverse linkages. Growth in horticultural production, for example,
with output exported or sold to urban markets, is an extreme case where
substantial input requirements, high-value output and significant cash income
are likely to create numerous local linkages. At the other extreme, staple
products are less likely to create local linkages because they provide little
cash income and tend to be low-input and consumed without processing. An
exception is cassava, discussed in Chapter 7.

The non-farm economy that emerges or fails to emerge in the
presence of agricultural growth is conditional on incentives to potential
investors and capacity to undertake such activities. Incentives are largely
driven by the profitability of an activity, which will depend among other things
on the macroeconomic framework, output and input prices and the risk associated
with the activity. The capacity to invest in non-farm activities will be
determined by the vector of assets - human, physical, financial, social and
public - owned by the individual, household or community. Incentives and
capacity to invest are strongly influenced by institutions (rules of the game)
and organizations (players in the game) and by the technologies available. This
means that the state and civil society play an important role in determining how
the non-farm economy responds to agricultural growth.

The direction taken by the non-farm economy depends on local
conditions, even with appropriate incentives and a degree of investment
capacity. Spin-off activities may not stay local if farmers purchase inputs from
distant sources, if output is processed in remote locations and if farmers use
income from goods imported into the region. The ability of a locality to capture
the benefits of the non-farm economy depends on local incentives and capacity,
which are directly influenced by government policy. As agriculture is
modernized, the concept of local is bound to become larger because
of economies of agglomeration in local intermediate cities and metropolitan
areas. How the expansion occurs and how great it becomes can be influenced by
government policy.

The types of linkages are explored in each of the case studies
in this volume. Attention is given to incentives, to capacity to invest in
non-farm activities and to the influence of local conditions.

CASE STUDIES

Six study regions, three in Latin America and three in
sub-Saharan Africa, were identified as being suitable cases for examining
non-farm employment spin-offs. Studies from these regions form the basis of each
chapter. An overview of each study is given here.

Chapter 2 (J. Edward Taylor and Antonio Yunez-Naude) examines
farm/non-farm linkages in Mexico using two methodologies: a village/town social
accounting matrix (SAM) and a village/town computable general equilibrium (CGE).
These models allow detailed examination and understanding of linkages between
the farm and non-farm sectors and calculation of multiplier effects. The results
indicate that although demand linkages are important, the largest of these is
with markets outside the local economy: a large share of inputs, consumption and
investment goods purchased by rural households is supplied by regional urban
centres. Village households are diversified away from agriculture, mainly
through family participation in labour markets outside villages, through wage
work or through migration to distant urban centres or abroad. They find that
where technological and other constraints limit the supply responsiveness of
agriculture, measures must be enacted to improve supply response if
farm/non-farm linkages are to be strengthened.

Chapter 3 (Fernando Rello and Marcel Morales) also focuses on
Mexico, in particular on the state of Querétaro. This state is chosen
because of the dynamic nature of the agricultural sector, which is largely a
product of the proximity of Mexico City and Querétaros strong links
with the hinterland. The chapter presents several case studies on
agro-industrial systems, which embody the characteristics and development of the
systems. The chapter examines the geographic linkages between agriculture and
small and medium-sized towns and intermediate cities. One of the main points
made by the paper is the importance of agro-industries in forging links, quite
often in conjunction with public agencies and non-governmental organizations
(NGOs). NGOs and certain public agencies have become particularly important
because of the institutional vacuum created by the withdrawal of the state in a
number of areas in Mexico. An important and expanding institutional development
noted in the case studies is the use of contract farming for certain
commodities. NGOs and public agencies have helped to facilitate these types of
relationships. Finally, the paper notes that links between the farm and non-farm
sectors depend on the scale of transactions, with smaller purchases such as
seed, animal feed and repairs made from small towns, mid-level products such as
fertilizers and agrochemicals from medium-sized towns and large purchases such
as tractors and trucks from intermediate cities.

Chapter 4 (Javier Escobal and Victor Agreda) examines recent
institutional innovations in two regions of Peru that have altered the
relationship between farmers and agro-industrial firms. These institutional
innovations included contract farming and share contracts in which managerial
services were traded for labour services and land. The results indicate that the
innovations were successful in improving the quality of farm/non-farm linkages.
The success of these innovations has been partially the result of a combination
of public goods and services and sufficient private assets, including managerial
ability. In the case of asparagus, however, contracts tended to favour large
producers at the expense of small producers. In the case of cotton, on the other
hand, the emergence of farmer companies increased employment of smallholders and
their incomes. The results indicate that the benefits of institutional
innovation depend on several factors, including the crop characteristics,
characteristics of farmers, public goods and services available and NGO
involvement.

Chapter 5 (Tassew Woldenhanna) focuses on farm/non-farm
linkages in the marginal Tigray region of northern Ethiopia. The study is
different from other studies in Africa, which have tended to focus on dynamic
regions. The basis of the study is survey data collected in two regions of
Tigray and on secondary data collected from national and regional government
offices. The results indicate that backward and forward production linkages are
limited and that expenditure and specifically consumption linkages are the
strongest form of linkage, as is the case elsewhere in Africa. The analysis
found, for example, that 86 percent of total expenditure is on regionally
produced farm and non-farm output, and that although non-farm expenditure
remains small at 21 percent of the total, it increases in importance as income
increases. The results show the importance of income diversification and
agricultural productivity and that farmers with off-farm income tend to be more
productive. The chapter concludes with a number of policy implications,
including the need for institutional support for developing linkages, the
importance of rural towns and targeting of specific vulnerable groups for
inclusion in the benefits of expanding non-farm activities.

Chapter 6 (Lydia Neema Kimenye) provides a detailed case study
of the French bean processing industry in Kenya. The French bean was chosen for
the case study because the Kenyan government has singled out horticulture as a
high-potential growth area; the sector has been expanding in recent years
through the export and frozen-vegetable markets. One of the main features of
this market is the dominance of contract farming as the primary means of
interaction between farmers and agro-industry. As part of these contracts,
farmers tend to get inputs from the processing firms and as a result production
linkages in the local region tend to be limited, with output going to the
processing firms and inputs purchased in bulk by the processing firms from urban
suppliers. The benefits of French bean processing to the local economy tend to
come primarily from the income gains of contracted farmers in the region and
their expenditures in local markets. Direct employment linkages to processing
firms, although not substantial, are potentially helpful to the local economy
through expenditures. One of the interesting results of the case study is that
one of the processing firms lost a market outlet as a result of quality problems
and did not pay its contracted farmers. Although contracting may appear to be a
safe market for farmers, it is clearly risky; the negative effects on a local
economy can be substantial.

Chapter 7 (Ramatu Al-Hassan and Irene Egyir) examines the
cassava subsector in Ghana. Cassava is almost always sold in a processed form,
so it has a high potential for non-farm linkages. Ghana has recently expanded
its export market for cassava chips, enhancing its value in the market. The
focus of the study is two high-potential agricultural regions that produce
cassava chips and an alternative local processed cassava product -
kokonte in Atebubu and gari in Nkwanta. Because it is a low-input
agricultural product, there are limited backward production linkages, but
because processing is necessary for the market and because of high
transportation requirements, there are substantial forward linkages. One of the
benefits of the expansion of the chip market in recent years has been the rise
in the price of processed cassava, including locally processed kokonte and gari.
Weaknesses in the export market for chips, however, partially for domestic
reasons, could limit this market and adversely affect cassava production and
linked industries. The study highlights the effects of market changes and the
importance of policies to complement private initiatives.

SYNTHESIS AND POLICY IMPLICATIONS

The case studies in this volume offer insights into
farm/non-farm linkages and suggest actions that might be taken to promote them.
In this section, the findings of the case studies are synthesized and
implications are drawn for policy and programme implementation. These
implications are divided into the institutional, organizational and
technological instruments that can be used.

Institutional

Contract farming is one mechanism that can help to overcome
market and organizational failures and link farmers with agribusiness; it has
the potential to provide substantial benefits to farmers, producers and the
rural economy. In order to provide these benefits, the state may in some
circumstances act as a facilitator, or third party, in triangular contracts.
This facilitation might come in the form of credit or technical assistance. An
alternative to state involvement is involvement of NGOs or even private entities
as third parties. One of the downsides of contract farming is the tendency of
agro-industry to purchase inputs from outside the production region, thus
limiting local backward linkages. Although contracts may appear to be a low-risk
alternative to selling on the spot market, there is a risk that contracting
firms may face difficulties and fail to honour contracts. States should assist
in developing this type of relationship and must ensure, through legislation and
their judicial system, that the rights of contracted farmers are
protected.

Evidence from the case studies suggests that entry barriers
may limit the ability of some households to participate in non-farm activities.
This may exacerbate income inequality, because wealthier households are able to
enter into lucrative non-farm activities and expand income, while poorer
households remain in low-return non-farm activities. A particular problem is
lack of access to credit, which can limit linkages in a number of ways. It may
limit the ability of households to enter into non-farm activities or expand
their current activities, and may limit farmers ability to take advantage
of opportunities for selling to agribusiness. Access to credit will not
guarantee expansion of non-farm activities, but credit limitations can hinder
development of such activities, because credit is often necessary for entry into
and expansion of non-farm activities. Credit may also be necessary for new crops
or new technologies that must be adopted to produce quality output for
processing. If non-farm activities are to develop, states need to assist with
credit access when markets do not function well.

Infrastructure and location have a substantial influence on
the creation of linkages; they can also be a barrier to entry, because poor
infrastructure limits opportunities. Governments need to invest in
infrastructure such as roads, electricity and telecommunications and other
public goods, primarily human capital such as education and health, that foster
the development of non-farm activities and increase their productivity. Rural
areas close to urban centers tend to have greater farm/non-farm linkages. Rural
towns play a significant role in agricultural development through linkages
between the non-farm and farm sectors; investment in infrastructures to promote
non-farm activities should concentrate on these locations.

Technological

Backward production linkages in Africa are generally limited
because of the low inputs in agriculture. Forward production linkages depend
largely on the commodity being produced and the type of processing. Expenditure
linkages are critical for African rural development: they are the primary
mechanism by which agricultural growth affects the non-farm sector. To foster
the development and expansion of farm/non-farm linkages in Africa, there must be
an emphasis on improving agricultural technology. Backward and forward
production linkages require modern agricultural-production systems. Governments
must consider actions that simultaneously promote complementary non-farm
activities such as input supply and output processing as well as promoting
agricultural technologies.

In Latin America, there are more backward and forward
production linkages; expenditure linkages within local economies are minimal,
because farmers tend to purchase items produced in distant urban centres. As
agriculture develops, the backward and forward production linkages tend to
become less local in that there is a tendency for many non-farm activities to
move to regional centres. This is often a result of modernization of the
agricultural sector, because transaction costs are inevitably reduced, allowing
such activities to shift from small local producers to larger regional
producers. This is not necessarily a problem, but regions should be assisted in
developing regional centres that can foster farm/non-farm linkages.

Organizational

In general, agribusiness plays an important and proactive role
in creating linkages to agriculture. Farmers often play a less important role in
forging linkages although without their active participation the linkages will
not work. Given that agribusiness has taken a lead in developing linkages
between the farm and non-farm sectors, it is important that the state create an
environment that is conducive to investment in agribusiness activities. One
reason for the lack of farmer initiation in developing farm/non-farm linkages is
that farmers tend not to be organized sufficiently to initiate new activities.
The lack of significant producer organizations limits the ability of farmers to
be proactive in forming linkages. Taking actions to promote these organizations
is likely to lead to a more dynamic agricultural system.

CONCLUSION

The numerous structural-adjustment and stabilization
programmes that have been implemented in developing countries have resulted in
states withdrawing to some extent from agriculture and rural areas. This has
created an institutional vacuum that has not been adequately filled. States
cannot and should not play the role they once did in agriculture, but they still
need to be engaged. States must reconsider their role in rural development and
ways in which they can foster and expand linkages. The case studies indicate
that the public sector and NGOs as well as private entrepreneurs play an
important facilitating role in developing linkages between agro-industry and
farmers. This role may include organizing farmers or assisting NGOs or private
enterprises to take on responsibilities previously discharged by states,
providing credit, assisting with inputs, providing information on technology and
ensuring that contract requirements are met. In this way, the public sector,
NGOs, and private entrepreneurs are helping directly to create beneficial
linkages between agro-industry and farmers, and indirectly creating other
linkages between the farm and non-farm sectors.